|AlphaShares Indexes||January 2012||2012||1 Year||3 Year|
|AlphaShares China All-Cap Index (NYSE: YAO)||11.31%||11.31%||-8.74%||22.78%|
|AlphaShares China Small-Cap Index (NYSE HAO)||8.23%||8.23%||-25.75%||22.73%|
|AlphaShares China Real Estate Index (NYSE: TAO)||13.99%||13.99%||-14.13%||20.82%|
|AlphaShares China Technology Index (NYSE: TAO)||12.79%||12.79%||-17.95%||36.07%|
|AlphaShares Yuan Bond Index (NYSE: TAO)||0.58%||0.58%||NA%||NA%|
|FTSE/Xinhua China 25 Index||11.57%||11.57%||-6.35%||17.28%|
|CSI 300 (A-Shares)||4.89%||4.89%||-15.13%||9.46%|
Divergent monetary policy was the theme in 2011, as most Emerging Markets were fighting inflationary pressures with monetary tightening, while most Developed Markets remained dovish. The recent success the PBoC has had on inflation creates policy room for more monetary loosening should there be a significant slowing of economic growth. The PBoC lowered their reserve requirement ratio (RRR) for the first time in nearly three years by 0.5% at the end of 2011 from its then record rate of 21.5%.
The International Monetary Fund (IMF) cut its 2012 GDP growth forecast to 8.25%, from its previous 9.0% reported in September, citing the threats of weakening exports amid an uncertain global economic environment - specifically mentioning the possibility of a sharp recession in the euro zone. Despite the slowdown and potential threats, the IMF did note that China has a track record of fiscal discipline and has the room for countervailing a fiscal response if necessary.
China has ample resources to avoid a hard landing, as it has policy firepower that most developed nations can only dream of. Despite falling $20.6 billion in Q4 as the trade surplus shrank and capital flows reversed, China's foreign exchange reserves remain the world's largest by far at $3.18 trillion. In addition, China expects to collect in excess of $1.6 trillion in taxes for fiscal 2011. Premier Wen Jiabao reiterated at month's end the government's plans to "fine-tune" policies to support growth amid a cooling domestic property market, and a global debt crisis threatening exports.
The AlphaShares China All Cap Index (Bloomberg: ACNACTR) had a good start to 2012 gaining +11.31%, following a challenging 2011 return of -17.96%. Large cap stocks (represented by the FTSE China 25 Index) fared better (+11.57%) than their Small Cap counterparts (represented by the AlphaShares Small- Cap index: ACNSCTR) during the month.
The AlphaShares Chinese Volatility Index, or "CHIX" (Bloomberg: ASCNCHIX), fell -7.76% to finish January at 24.49. The CHIX had closed 2011 at 26.38, +31.83% from the prior year after trading in a range between 17.24 and 53.35. Fears in China subsided going into the Chinese New Year celebration. The CHIX traded as low as 22.98 ahead of the holiday whose mythical creature, the Dragon is associated with auspicious fortune and optimism for better times ahead.
With the CHIX trading in the low 20s, hard landing fears have seemingly receded as investors expect the Chinese central bank to quickly address any threatening slowdown in the world's second largest economy. Still, data is painting a mixed picture of the Chinese economy. Retail sales grew 18.1% from a year earlier in December, and Industrial output also exceeded expectations, up 12.8% year on year. However, housing investment dropped precipitously in December, and many property developers have warned that 2012 looks grim.
The China Securities Regulatory Commission (CSRC) announced on January 10th that it has established an investor protection bureau, in a move to better protect the rights and interests of Chinese investors in the capital markets. Despite a rising number of institutional investors, China's capital market is still dominated by individual investors, who often lack professional knowledge and are "insensitive but vulnerable to risks". Individuals contributed to more than 80% of the total market turnover in 2011. Natural disadvantages in obtaining market information and professional ability can easily lead to infringements of their rights. Chinese Premier Wen Jiabao pledged at the country's national financial work conference to enhance the regulation of the equity markets to better protect investors' legal rights and interests.
After being the largest positive contributor to index returns in 2011, China Unicom Holdings (762 HK) was the largest detractor to index returns to start the New Year. After gaining over 48.03% last year, shares of China's second-largest phone company started this year -12.47% in January. Unicom is the only one of the country's three service providers offering Apple's iPhone with a service contract. Apple, whose skill at hyping new products helped make it the world's most valuable company this month, became a victim of its own success after a botched introduction of its iPhone 4S in China led it to suspend sales. Hopeful customers who camped out overnight as temperatures dropped below zero reacted with fury after the company's main store in Beijing's Sanlitun district failed to open due to crowd control safety concerns.
On the other end of the return spectrum, China's largest offshore energy explorer, CNOOC (883 HK), had the largest drag on China 2011 returns, -26.30% in 2011, yet was the second largest positive contributor to January index returns +17.56%. The Industrial & Commercial Bank of China (1398 HK), the world's largest lender by market value, was also the largest index contributor, +17.97% in January. Financials were the best performing sector this month, +14.89%, followed by Technology +14.38% and Energy +13.89%.
|Jonathan J. Masse, CFA||Dr. Burton G. Malkiel|
|Senior Portfolio Manager||Chief Investment Officer|